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SEC’s Placement Agent Probe Continues

Since the SEC passed its pay-to-play rule in June, the feds have clearly been looking for a target to “make an example out of” as a way of showing they are serious about pay-to-play. A sacrificial lamb appears to have been found as SEC spokesman Kevin Callahan has put the public on notice that the SEC will be taking an increased interest in the role placement agents play following pay-to-play scandals in other states. Recently, the SEC opened an “informal inquiry” into the Kentucky Retirement Systems’ (“KRS'”) use of placement agents as a result of one of KRS’s own internal audits. KRS oversees a $12.5 billion fund for state and county retirees.

KRS’s audit identified one well-connected placement agent, Glen Sergeon (say it with me: “Baaaaaa”), as having done more work for the fund from 2004 to 2009 than any other agent. While the fund found no evidence of illegal activity, due to the possibility of perceived appearance of preferential treatment, KRS’s compliance officer recommended that pension staff be required to publicly disclose all personal connections with placement agents going forward – a step beyond the policy the pension program put in place last year requiring disclosure of placement agent names and fees paid. The KRS Board of Trustees is also speaking with state auditors to conduct an independent review of KRS’s use of placement agents.

On September 9, the SEC’s Division of Enforcement in New York sent a letter to KRS requesting KRS produce information about payments to placement agents used by the fund, no later than September 22. Specifically, the SEC requested a copy of the internal audit, as well as records held by KRS that contain placement agents’ fees. The SEC said that no one is accused of wrongdoing. I’m sure Glen Sergeon begged to differ when KRS Trustee and investment specialist, Christopher Tobe, who supports a ban on placement agents (See also See also Comment Letter of Kentucky Retirement Systems Trustee Chris Tobe Sept. 18, 2009, “Tobe Letter”) stated, “I believe the SEC shares my concerns that 12 separate deals of over $600,000 [per placement agent] were struck – five over $1 million – that may imply more than simple commissions. I also believe that the fact the staff and selected trustees concealed the fact we had placement agents for over six years is of concern.” KRS’s nine-member Board of Trustees is holding a special meeting today to discuss the SEC’s letter.

SEC’s Placement Agent Probe Continues